Wall Street Gets Tough on PeopleSoft

For months now, the bears have been saying analysts will have to trim their 2004 estimates because PeopleSoft set unachievable guidance in order to fend off rival Oracle's ( ORCL) hostile takeover bid. That cutting has begun in the past few days, amid speculation PeopleSoft could preannounce a first-quarter revenue shortfall as early as this week.

On Friday, Prudential analyst Brent Thill ratcheted down his estimates, citing Oracle's effect on PeopleSoft business. Previously, he had been projecting PeopleSoft would earn 98 cents a share on $3 billion in revenue in 2004, but lowered his EPS target to 89 cents a share on $2.8 billion in revenue. He also reduced his license revenue estimate for the year to $655 million from $752 million. (Thill has a neutral rating on PeopleSoft; Prudential doesn't do investment banking.)

Thill also lowered his first-quarter license revenue estimate to $130 million from $140 million, his total first-quarter revenue target to $625 million from $635 million, and earnings to 17 cents from 18 cents a share.

In January, PeopleSoft said its business is becoming more seasonal and conservatively projected a sequential decline in license revenue of 25% to 30%, bringing it to $130 million to $140 million. The company forecast it would earn 16 cents to 17 cents a share in the first quarter on total revenue of $625 million to $635 million.

On Monday, ThinkEquity analyst Yun Kim downgraded PeopleSoft to equal weight from overweight, lowered his 2004 earnings estimate by a nickel to 88 cents a share, and cut his 2004 revenue estimate to $2.84 billion from $2.88 billion. Kim sees license revenue falling to $693 million from $739 million.

The cuts brought Kim's targets below PeopleSoft's ambitious 2004 guidance of 92 cents to 95 cents a share in earnings and $700 million to $715 million in license revenue. His revenue estimate falls within the company's targets of $2.8 billion to $2.9 billion. (ThinkEquity hasn't done banking with PeopleSoft.)

Kim argued that fewer large-sized deals could make the company miss its 2004 license-revenue target.

"We believe that time is running out for the company to generate and qualify leads for large-sized deals, which typically have sales cycles that run at least nine months," Kim wrote.

To be fair, PeopleSoft has proved its naysayers wrong before, beating targets for the past three quarters. Just because PeopleSoft may miss its targets for all of 2004 doesn't mean it will come up short in the current first quarter, acknowledged Kim, who left his first-quarter estimates unchanged.

He believes PeopleSoft continues to build sales momentum -- albeit in smaller deals -- and will meet his targets calling for earnings of 16 cents a share on $633.1 million in revenue in the first quarter.